JPMorgan, Citi, Regions Financial, and Other Bank Stocks Look Strong

By

Michael Kahn

December 8, 2014

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Last week’s better-than-expected employment report gave the domestic financial sector a shot of adrenaline as banks, brokers and financial services scored technical breakouts. Even the much-maligned Citigroup (ticker:
C)
is now outperforming the broad market. And the U.S. in general continues to be the best place for investment dollars anywhere.

The widely followed KBW Banking Index, known as the BKX, is trading at a six-year high after moving above a year-long trading range. Friday’s strong performance sent many components jumping higher, creating a powerful technical signal called a “breakaway gap.”

Gaps occur when supply and demand move so far out of equilibrium that prices cannot trend smoothly from one level to the next. They leave a space, or gap, on the chart where there is no trading. And when they occur as a stock or index is breaking out from a pattern as the financials have done, then we surmise there was a sea-change in market mood. A continuation higher is likely.

JPMorgan Chase (
JPM
) offers a textbook illustration of a breakaway gap with both strong price action and heavy volume (see Chart 1). The trend, by any measure, is to the upside.

Chart 1

J.P. Morgan Chase

We can see similar action in other large stocks, including Wall Street banks such as Morgan Stanley (
MS
) and Goldman Sachs (
GS
). But strength was pervasive across the broker and investment banking group as smaller stocks, including TD Ameritrade (
AMTD
) also scored upside gaps. It is interesting to note that Ameritrade and Morgan Stanley actually broke out on Dec. 3 with little fanfare. Technically, these two are likely leaders going forward.

The regional bank sector did not reach new highs, but the chart of the SPDR S&P Regional Banking ETF (
KRE
) is rather pretty, at least to a technical analyst. From March through October, it trended to the downside, albeit with plenty of volatility along the way. It broke out to the upside late in the month and pulled back to “test” that move in November (see Chart 2).

Chart 2

SPDR S&P Regional Banking ETF

While the pullback itself was deeper than bulls normally allow, the ETF finally did get moving to the upside, gapping higher Friday after the jobs data.

While domestic banks and financial firms of all types and sizes seem to be in good shape on the charts, banks around the world cannot make the same claim. European banks, for example, have been in decline all year. Chinese and Indian banks have been moving higher recently but South American banks have been mixed at best.

There are no surprises there as European economies have stumbled and the Chinese stock market, in particular, has been soaring of late. The most dramatic foreign move is north of the border in Canada. Major banks, such as Bank of Nova Scotia (
BNS
) and Toronto Dominion (
TD
) have been under intense selling pressure, with three-day losses on the order of 7% for many.

Bank of Nova Scotia reported a 14% drop in earnings last Friday as the entire sector suffered a disappointing earnings season. Canada’s top banks derive a big percentage of their revenue from the energy industry and became collateral damage to plunging oil prices.

Indeed, Canada’s broader stock market is one of the worst performing major markets right now thanks to banking and to energy stocks.

Investors looking to put money to work are likely to find better stocks in the domestic market. For example, Regions Financial (
RF
) has a similar breakout to the regional bank sector but it is even better in terms of technical formation (see Chart 3).

Chart 3

Regions Financial

Money is flowing in at a good clip, according to the on-balance volume indicator. It also has a less ambiguous breakout and plenty of room before major chart resistance is encountered. Barron’s wrote a positive story on Regions in May.

Low bank prices across the globe do not translate into cheap stocks. Look for groups and stocks that are actually moving higher at a reasonable pace, because fighting a falling trend is usually not a good idea.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

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